Oil Price Fundamental Weekly Forecast – Buyers Cautious as Markets Near Pre-Omicron Price Levels

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed higher last week, posting its largest weekly gain since last August. Driving prices higher was optimism the Omicron coronavirus variant would not lead to significant demand destruction.

The market was also supported by residual gains from the previous week’s decision by OPEC+ to increase production in January. This news actually served as a vote of confidence in the group’s demand outlook.

Traders showed little reaction to last week’s inventories reports from the American Petroleum Institute (API) and the Energy Information Administration (EIA).

Last week, March WTI crude oil futures settled at $71.22, up $5.29 or +8.02% and March Brent crude oil ended at $74.91, up $5.40 or +7.21%. The United States Oil Fund ETF (USO) closed at $52.03, up $4.03 or +8.40%.

Omicron Remains the Wildcard

Although the lack of strong evidence Omicron is causing any significant demand destruction is underpinning prices, concerns around the effectiveness of vaccines is helping to cap those gains.

Prices have retraced between 50% – 61.8% of their sell-off, which is a normal correction. This suggests the buying and selling has become balanced. But we know that won’t last long. Since Omicron news has driven the market both down and up, we see no reason for this to change over the near-term. The longer the market stays balanced, the closer we move toward heightened volatility.

Inventories Data a Non-Event

Last week’s inventories reports from the API and EIA failed to move the needle much with Omicron grabbing most of the headlines and seemingly keeping the major players on the sidelines during this period of uncertainty.

On Tuesday, the API estimated the inventory draw for crude oil during the week-ending December 3 at 3.089-million barrels. Analysts were looking for a build of 2.093-million barrels for the week. Gasoline inventories of 3.705 million barrels were reported and distillate stocks were up 1.228 million barrels for the week.

Meanwhile, U.S. crude stocks fell less than expected in the latest week while production rose and fuel inventories increased, the EIA reported on Wednesday.

Crude inventories fell by 240,000 barrels in the week to December 3 to 432.9 million barrels, the EIA said. That was less than analysts’ expectations for a 1.7 million-barrel drop. Gasoline stocks rose by 3.9 million barrels in the week, compared with expectations for a 1.8 million-barrel rise.

Weekly Outlook

The new week begins with new concerns about the Omicron coronavirus variant and doubts around the effectiveness of vaccines against it expected to keep an early lid on prices.

Furthermore, even though both futures contracts posted more than 7% gains, they are still trading below pre-Omicron levels.

Traders are being cautious with the following statement seemingly setting the tone for traders. The Omicron coronavirus variant, reported in more than 60 countries, poses a “very high” global risk, with some evidence that it evades vaccine production, according to the World Health Organization.

Additionally, Oxford University also said vaccines showed to induce lower levels of protection against Omicron.

Although speculative buyers could drive prices higher at times this week, I don’t see the markets rising too much above their pre-Omicron levels until there is more information about the effectiveness of the variant against the new variant.

Traders are also bracing for more supply this week after the U.S. Department of Energy said on Friday it will sell 18 million barrels of crude oil from its strategic petroleum reserve (SPR) on December 17. The reaction could be limited, however, since the announcement is part of a previously announced plan designed to reduce gasoline prices.